The Union Cabinet's decision to approve a government guarantee of up to Rs 30,600 crore for security receipts to be issued by National Asset Reconstruction Company Ltd (NARCL) is a welcome step as this would reduce the burden of unwanted assets on banks and improve their balance sheets, say market experts.
That apart, the move is also expected to improve credit offtake, which may lead to a gap-up opening for Bank Nifty on Friday, they feel.
Let's take a look at how market experts interpret the development -
"This is a welcome decision for banks as this would help in losing off its baggage unwanted assets and can function more efficiently," said Gaurav Garg, Head of Research at CapitalVia Global Research.
Garg further said the banking stocks are expected to do well on September 17 (Friday) and one can expect a gap-up opening for Bank Nifty.
Rahul Sharma, Co-Founder at Equity99, echoes similar views and expects the banking sector to make a good move on Friday. The expert feels it's a great move by the government, especially for debt-ridden PSU banks, which have been lagging valuations due to loads of NPA.
Aprajita Saxena, Research Analyst at Trustline Securities feels a bad bank formation is a good banking strategy. "It is anticipated that bad bank is likely to take over Rs 80,000 plus crore in the first phase."
"These security receipts would be tradable in the secondary markets and would infuse much-needed liquidity in the banking system. This bad bank will take over the existing toxic debts of banks and dispose them off to realize value locked in these assets. So, it will definitely improve the balance sheet of lead lenders as well as providing some incremental cashflows to them as well," Aprajita said.
Pushkaraj Kanitkar, VP Equities at GEPL Capital also said this would help improve balance sheets of several PSUs with legacy NPAs still weighing on the asset quality.
The benchmark indices extended an uptrend for the third consecutive session on September 16 and the last two sessions clearly boosted confidence among market participants. The BSE Sensex and Nifty50 hit fresh record highs, climbing new milestones of 59,000 and 17,600 levels, gaining more than 1.5 percent while the Bank Nifty rallied 3.3 percent in three sessions. Today, the PSU Bank gained the most among sectors, rising 5.4 percent.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said since the banks would remove these NPAs from their balance sheets, they can focus on lending activities that can help trigger a fresh round of credit off-take that the economy badly needs.
Who are beneficiaries of this move and what should investors do?
Investors can hold on to the positions in banking stocks as the short to medium term for the sector looks quite bright now, Gaurag Garg advised.
Rahul Sharma of Equity99 also recommends holding banking stocks especially PSU banks. "Our top picks are Canara Bank, PNB & SBI."
However, Saxena doesn't recommend immediately buying banking stocks but to wait and time any fresh entry although quality large-cap banks stocks can be bought right now. "Banking Stocks, for instance, SBI, PNB, Union Bank of India, YES Bank, IndusInd Bank are the few beneficiaries and will be on the radar."
Santosh Meena, Head of Research, Swastika Investmart feels this is a very positive trigger for PSU banks and the overall economy for liquidity in the system; however, the market has factored in this news in the last two trading sessions.
"We may see some more upside in PSU banks tomorrow (September 17) but profit booking can't be ruled out at higher levels however this event could be a long-term positive trigger for PSU banks and the infrastructure sector," Santosh Meena said, adding SBI will remain their top pick in the banking sector and it may outperform most of the private banks in coming years.Disclaimer: The views and investment tips expressed by the investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.